The riskiest businesses

Clients have all sorts of ideas, of course, but few that can combine flights of fancy and the risk of tax trouble like unusual business ventures. Here’s what a selection of tax pros and accountants ranked as the riskiest ventures they were ever asked to advise on – and the outcomes.

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Clients have all sorts of ideas, of course, but few that can combine flights of fancy and the risk of tax trouble like unusual business ventures. Here’s what a selection of tax pros and accountants ranked as the riskiest ventures they were ever asked to advise on – and the outcomes.

Early adapter

“Years ago, a client was recruited to become part of a local Ponzi scheme before it was even called that,” reported Eric Hansen of Hansen Accounting in Omaha, Neb. “I saw red flags as he told me about it. The client was jumping with all three feet to sign up and didn’t like my opinion. He made an initial small investment against my advice.”

That money is gone, but the client is still with Hansen.

Trading time for land ...

... or using individual retirement accounts to purchase real estate. These deals can be fraught with problems, “including the potential of having the entire retirement account disallowed and taxable in one year,” said Terry Bakker, an Enrolled Agent at O’Leary Tax Service, Vancouver, Wash.

Escape claws

A client of CPA Gail Rosen wanted to invest a retirement account in a store that specialized in cat paraphernalia. “We did a break-even analysis that demonstrated that it would be near impossible to achieve the sales needed to cover her costs before even paying her a salary,” said Rosen, a shareholder in the Martinsville, N.J., office of Wilkin & Guttenplan.

Fortunately, the client listened to Rosen: “She chose to walk away from this business idea.”

Gone to pot

Cannabis manufacturing was a touchy idea for a client of EA Kerry Freeman of Freeman Income Tax Service, in Anthem, Ariz.

Despite “the current federal regulations and an illegal product and the conflict with state interest to increase taxes,” Freeman said, “many only see dollar signs – and, like many inexperienced or new business owners, don’t understand the paperwork and filing requirements required. Cash might be king, until you’re not compliant on your tax forms.”

Joint disagreement

Folks, including feds, also don’t always agree on what makes a tax problem (or a recreational activity). For John Dundon, an EA at Taxpayer Advocacy Services in Englewood, Colo., it was a tax year 2009 Form 1120S under examination by the IRS for a marijuana dispensary – “whereby IRC 280E, 263a and 471 proved to be contradictory statutes without standards of enforcement in light of Federal District Court rulings and U.S. Tax Court rulings,” he noted. “As a result, one RA would be denying all claimed expenses as trafficking in a narcotic pursuant to IRC 280E and another RA (in the same office) would be much more liberal in accounting for expenditures ...”

House of glass

Laurie Ziegler, an EA at Sass Accounting in Saukville, Wis., had a client who started developing, bottling and distributing alcoholic beverages. That was “risky because there are a lot of regulations that need to be adhered to that he didn’t research up front and then had to scramble to respond,” Ziegler said.

Not to mention that this client was disorganized, didn’t keep good records and used loan funds meant to be used for the business development to purchase expensive cars. “It ended up costing his home,” Ziegler said, “which he’d put up for collateral.”

Closing time

Maybe too many clients binge-watch “Bar Rescue” or “Kitchen Nightmares.” It must be watching that makes them think they can run and/or invest in a bar or eatery and become “industry professionals, with little or no experience,” said Arizona’s Freeman. “Of all the businesses that one can start, the restaurant industry has the highest failure rate, bar none.”

Please, not ‘a sudden inspiration’

“My client was an attorney working in Russia. He had a sudden inspiration to invest in popcorn vending machines there,” said Wilkin & Guttenplan’s Rosen.” Rosen talked him down by discussing the various business risks involved in international business and business in Russia, including currency risk, political instability and exportation risk, among others. He finally said nyet.

Risk - and, finally, reward

Another of Rosen’s clients came in to discuss a new restaurant they were opening for their son, who was a recent culinary school graduate. The son had little experience, the selected location was not a high traffic area, and they were funding it from their retirement account.

“The lease was already signed, so there was no room for error,” said Rosen. A few years later, they learned a lesson that risk doesn’t always equal crash and burn. “They have enjoyed huge success and I frequently dine there,” Rosen said. “I’m advising them on the opening of a second location.”